Accounting for the big plunge in “music sales”: the digital singles effect

CD sales are down sharply while downloads aren't growing fast enough to make …

The music industry quaked yesterday as reports surfaced indicating that CD sales have plummeted 20 percent compared to the same period last year. This is just the latest a string of bad news for music sales going back several years. The question is, what's to blame?

The Wall Street Journal, which brought news of the decline, correctly notes that the demise of the boutique music store has certainly played a role in this. 800 stores closed in 2006, according to the Journal. Of course, those stores closed for a reason: they weren't selling enough music to stay profitable. Still, the effect on total sales would be hard to dismiss.

All the while, legal downloads continued to grow, but so far the focus from analysts and the press has been on how legal downloads have failed to "fill the revenue gap" created by the shortfall in traditional CD sales. What deserves further examination, however, is whether legal downloads are causing that shortfall. We do believe that they play a significant role in the music industry's current situation.

This quarter, 81.5 million CDs will be sold. While that's down 20 percent from the same period last year, digital singles sold by the likes of Apple's iTunes store grew 54 percent, to account for 175 million songs sold. In other words, the quantity of downloaded songs far outweighs the quantity of CDs sold as a whole. How many of those purchases are "singles," as opposed to digital album sales conducted online or subscription downloads?

Last year the industry saw about $2 billion in revenues from online music sales, and nearly $800 million of that stemmed from single-track sales, according to the International Federation of the Phonographic Industry's report. That leads me to estimate that at least 40 percent of sales are singles, which means that this quarter we could see something in the range of 70 million "singles" sold digitally.

The question is: how often does a consumer opt to buy just one or two songs off an album rather than buy the whole thing? This phenomenon must affect the top of the music charts quite viciously. I know I'm reluctant to buy an album, especially anything approaching a "hit album," unless I know that there's more than 2 to 3 songs on it that I like. Otherwise, I don't want to take the "risk."

But to answer the question of how often, let's just estimate based on what limited information we have. Given the estimate of 70 million digital singles, we could say that the ratio between consumers buying digital songs and entire CDs is approximately 1:1.22. That's quite a leveling. If my estimates have been conservative, the balance may be tipped even more in favor of digital singles.

Whereas years ago most consumers would drop their hard-earned cash on a whole album just to get "Tom's Diner," that same song can now be had for a buck. In other words, the business is changing. Legal downloads are on the rise, physical CD sales are on the decline, and consumers appear eager to purchase digital singles. Even if they're not just buying one or two songs off an album, that prudence can be devastating to CD album sales. Generally speaking, it takes 10 songs to reach the cost of an "album" (if generalized to $10), so even someone buying a handful of songs off an album leaves a "revenue gap" compared to a whole album sale.

There are certainly more factors involved in this than just the sale of digital singles. Competition with other forms of entertainment, such as the Internet, is also eating into both music and television. Many of our readers also cite a declining quality in music from the major labels.

But it goes without saying that the industry will blame much of this decline on P2P file sharing. Studies have thrown considerable doubt on the actual effects of music piracy, though, with one recent study arguing that its effects are "not statistically distinguishable from zero." It's worth considering other causes for this decline.

Ken Fisher / Ken is the founder & Editor-in-Chief of Ars Technica. A veteran of the IT industry and a scholar of antiquity, Ken studies the emergence of intellectual property regimes and their effects on culture and innovation.